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Tax reform should seriously look at industry levies

31 January 2024

While most policymakers recognise that our tax system would benefit from reform, our first priority should be to stop making it worse.

Late last year, the Productivity Commission released research on the recent proliferation of industry levies in Australia – sector-specific “micro-taxes” imposed by Commonwealth, state and territory governments.

The number of these industry levies has exploded over the last few decades, from just 26 in 1980 to 248 today.

This ‘Levyathan’ is the long tail of Australia’s tax system, accounting for more than 90% of all taxes by number but collecting less than 2% of overall tax revenue.

As the number of levies has grown, their role has also expanded.

The initial purpose of levies was to fund agricultural marketing and research programs in response to industry requests.

But they are now increasingly used in other sectors to pursue a range of objectives, including cost recovery for government regulation and the mitigation of environmental costs.

These are legitimate policy goals, and in some circumstances, levies can be an efficient way of achieving them.

But our research also reveals that industry levies have also become the ‘path of least resistance’ for governments seeking to raise more revenue – a path that risks incurring greater economic costs down the track.

Sound, widely accepted tax policy principles suggest that it is preferable to impose low tax rates, applied to broad and efficient tax bases, with relatively low administrative and collection costs.

In practice, however, many industry levies are narrowly applied to inefficient tax bases, such as transactions, revenue, or inputs to production.

And they tend to have relatively high collection and administration costs.

Over the past few decades, governments have built up an impressive range of micro-bureaucracies to collect these micro-taxes.

There are now 70 government departments across Australia collecting levies, with many agencies running their own paper or online payment systems.

Last year, one agency managed to collect a meagre $25.62 from levies on wild goat carcasses – just enough money to buy the collection team a few slices of paleo pear and banana bread.

Why has the number of levies increased so sharply?  The desire for secure funding sources, a reluctance to find spending offsets, and rules around government budget processes are all likely to play a role.

There is also a broader public choice explanation: voters may be prepared to put up with a new, narrowly applied industry levy (always applied, of course, to someone else), rather than accepting a spending cut to their favourite program, or a small tax increase across a broader base.

One thing is certain: a further proliferation of levies will likely hold back future productivity growth.

Despite the increase in their number, little is known in practice about the efficacy of industry levies as funding instruments.

Formal levy reviews are as scarce as hen’s teeth, and they rarely compare micro-taxes with alternative policies.

Going forward, improved data collection, more information sharing and integration across jurisdictions could better inform these levy-specific reviews.

Governments could also restore policy discipline to the introduction of new levies, as well as decisions to maintain existing levies, by being clear about their policy purpose, and by rigorously assessing the costs and benefits of micro-taxes relative to policy alternatives.

Unless the tide is turned, on current trends, we may one day wake up to an Australian tax system that features more than 500 different industry levies, crimping our productivity growth and living standards.

Reform of the Australian tax system will be a long journey, but choosing not to make the system worse should be an easy first step.

This article was written by Deputy Chair Alex Robson.